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Heard Off the Street: Push is on to advise employees on company 401(k) plans

Monday, June 17, 2002

By Len Boselovic, Post-Gazette Staff Writer

Now that the dart board theory of investing (stick the stock pages on the wall and buy what your darts hit) has lost its credibility, many investors are at a loss over what to do with their money. This is especially true when it comes to deciding how to allocate the pretax dollars that go into their 401(k) plans.

Chances are that the decision of many employees is based on what the Dilbert in the next cubicle recommends rather than on a well conceived strategy based on their retirement goals, risk tolerance and how much longer they'll be working. While there are plenty of retirement calculators and other online tools that can help employees, investors who tinker with them seldom revamp their portfolios based on what they learn.

So it's not surprising that a recent survey by benefits consultant Towers Perrin indicates that nearly half of the human resource executives responding believe employees are less than "somewhat educated" about making retirement savings decisions.

"Our findings suggest that employers are not doing enough to successfully communicate the basics of investor education," says Mark Schumann, head of Towers Perrin's communications practice.

There are no good statistics on just how much return investors are missing out on by flying blind in their 401(k), but it's clear that many of them have suffered. A study by the Employee Benefit Research Institute, a Washington, D.C., think tank, indicates employees had nearly 19 percent of their 401(k) assets in company stock in 2000. Hope all of them didn't work for Enron.

EBRI figures also show that in the same year, there was very little change in how 401(k) participants allocated their 401(k) contributions. While that's not necessarily bad, it's not necessarily good either.

"Once they're in, they really don't change their investment portfolio," says Meg Doyle, a principal with Towers Perrin. "Employees do need more advice than the education they've received thus far."

The degree to which employees are knowledgeable about retirement investing is largely a by-product of current law. It's geared more toward educating investors about the importance of diversifying, understanding risk and other broad investment topics. Much of this is done through newsletters, seminars, annual reports and the like. While some companies go as far as hiring an independent adviser their employees can consult, in general employees receive very little specific investment advice based on their circumstances. For companies, it's safer to stick with education rather than run the risk of being sued for providing inappropriate advice.

Pension reform proposals currently before Congress could change that. In addition to addressing the issue of employer stock, they would make it easier for companies to provide advice and for employees to take advantage of it.

"Everybody's on the same page with respect to that need," says James Delaplane, vice president of the American Benefits Council. The Washington, D.C., interest group represents companies that sponsor or administer retirement programs covering more than 100 million workers.

The House-approved version of the legislation would let investment firms that administer pension plans provide the advice. The firm would have to disclose potential conflicts of interest, such as whether it provides investment banking or other services for the employer. Current law prohibits investment providers from serving as investment advisers.

Critics argue that disclosing the conflicts won't prevent investors from being victimized by them. It also could lead to trouble in 401(k) plans where employees can choose from more than one mutual fund family.

"I might be wrong, but I don't think I'm ever going to see Vanguard recommend Fidelity funds," says Mike Scarborough, whose Annapolis, Md., firm advises employees on how to invest their retirement money.

The House version would also let employees use pretax dollars to hire a retirement planner to counsel them on how to invest their 401(k) money. That would be a boon for people such as Scarborough. For a flat annual fee of $365, he manages individual's 401(k) money, allocating their retirement money based on their age, risk tolerance, retirement goals and contribution levels.

Under the Senate version, sponsored by Sen. Ted Kennedy, D-Mass., companies could continue to hire independent investment advisers, but alleviate their liability concerns. As long as the advisers met certain criteria, the company couldn't be sued by employees. Separate legislation introduced by Sen. Jeff Bingaman, D-N.M., would give some employers a modest tax credit for hiring an independent advisor for employees.

Scarborough is optimistic Congress will enact some sort of pension reform before adjourning, figuring lawmakers feel they have to look like they're doing something in the wake of Enron. Doyle isn't so sure, putting the odds at 50-50.

"The longer we go into summer, the chances become even slimmer," she says.

Perhaps the more fundamental issue is whether employees can be trusted to invest wisely for their retirement. Resolving that riddle is all the more critical as fewer American workers are covered by traditional defined benefit pension plans where the employer is responsible for investment decisions.

It was a lot easier for employees to accept responsibility for managing their retirement money when it was just a matter of throwing darts. Bearing the same responsibility these troubled times means that, no matter what relief Congress provides, employees must make better use of the resources already available to them.

Len Boselovic's e-mail address is lboselovic@post-gazette.com.

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